Target profits drop 90% as retailer tackles supply chain and inventory issues to restore omnichannel balance

Ouch! No other word for it as Target – the leader in omnichannel retail of choice – saw its second quarter profits slump nearly 90% year-over-year due to ongoing problems with supply chain management.

But while profits fell to $183 million from $1.8 billion a year ago, revenue hit $26 billion from $25.1 billion a year ago. Digital sales grew 9% year-over-year and same-day fulfillment services saw an 11% increase.

Target CEO Brian Cornell was defiant on the post-earnings analyst call, insisting that the company’s decision to make a “bold effort” to “adjust” the inventory problems of the detailing had been a short-term pain, but necessary to restore balance:

Consider the alternative – we could have kept excess inventory and attempted to manage it slowly over several quarters or even years. While this may have reduced the financial impact in the short term, it would have hampered our business over time. Of course, this decision would have resulted in additional costs to store and manage excess inventory over a longer period. But more importantly, it would have degraded the customer experience. This would have crowded our sales force and hampered our ability to present new, fresh and fashionable items that our customers have come to expect from Target.

Equally important, the extra inventory would have been a permanent burden on our supply chain and outlets, as they face the distraction of working around it day in and day out. Instead of taking this passive position in the inventory we already had and cutting revenue for the second half of the year. And today, with those decisions behind us, we’re in a much better position as we head into the fall season.

There are still successes to highlight, he said, citing digital initiatives as a concrete example, citing:

our industry-leading same-day services that have transformed our business in a short time.

Specifically, three years ago, in the second quarter of 2019, digital execution accounted for just over 7% of total sales. In contrast, in the second quarter of this year, the same-day portion of our digital sales accounted for more than 10% of our total sales. This has brought our total digital penetration to nearly 18%, more than doubling in just three years… Whether a customer wants to take a typical in-store shopping trip, place an order in the drive, arrange for a Shipt delivery, or simply have a box delivered to their front door, stores can respond to each of these needs quickly and reliably, allowing our customers to choose what is best for them at the time.

Not easy

But getting the supply chain in order hasn’t been easy, added COO John Mulligan, a surprising admission given Target’s proven expertise on this front:

While this inventory resizing process was not easy and our teams put in an incredible amount of effort in a short period of time, this work allowed our teams to strengthen ongoing communication mechanisms and create new processes.

Going forward, these enhancements will allow our merchandising and supply chain teams to maintain improved real-time communication, especially around the categories where we have faced the highest inventory risk, which will allow us to react to changes with greater speed and agility. While the pressure of excess inventory has been the biggest challenge for our team this year, managing high costs and external supply chain volatility has followed closely behind.

And there are mixed signals moving forward, he warned:

And today, as conditions remain far from what we would have considered normal in the years before the pandemic, there are early signs that costs and volatility may have peaked. Specifically, delivery times in global shipping have started to decrease. Spot rates for moving shipping containers have come down somewhat. And in light of the reduction in oil prices, which we’ve all seen recently, fuel surcharges have come down somewhat from the peak rates we saw earlier in the second quarter.

That said, conditions remain very unfavorable compared to the years before the pandemic and we are aware of the continuing risks in the months to come. including potential slowdowns at West Coast ports, a reversal of the recent drop in energy costs, and the possibility of additional COVID lockdowns in China.

my catch

At a time when many others will struggle to survive, the ability to play offense and focus on the long term positions us well to emerge from the current recession even stronger than before.

It’s a combative speech from Cornell, but not enough to calm the nerves of Wall Street jitters. But Target clearly made the right decision to quickly and surgically address its supply chain and inventory issues, even if the price has been that headline-grabbing profit slump.


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